Savills IM prefers long-lease income as economic growth slows in 2020, the investment manager highlights in its market outlook

Savills Investment Management (Savills IM), the international real estate investment manager, prefers long-lease income streams in 2020 instead of value-add and opportunistic strategies that depend on economic and strong employment prospects.

At the current late stage of the investment cycle, the outlook for pan-European occupier markets is weaker than it has been for some years. Various forecasters expect economic growth to remain subdued over the next 12-18 months as global demand loses momentum and several geopolitical risks remain unresolved. Nonetheless, Savills IM’s 2020 Outlook highlights that opportunities remain in the office, retail and logistics sectors, but investors must be mindful of asset location, structural changes and resilient formats, among other characteristics.

Andreas Trumpp, Head of Research, Europe, at Savills IM, commented:

“At this point in the cycle, we are seeking long income streams. We prefer CBDs, fringe-of-CBDs and central city locations where buildings are located close to good transport infrastructure. Markets where modern, efficient office space is in short supply can also provide some interesting opportunities. Multi-let assets with short lease lengths in central locations provide opportunities for rental growth via active management.

“Retail assets that cater to the shopping experience, such as outlet centres, or convenience shopping formats such as retail parks – which have limited nearby competition and are easily accessible to large population catchments – look attractive, too.

“Accessibility to main transport networks and labour are crucial ingredients in the logistics recipe. As such, we like large modern distribution warehouses that are close to main transport networks as well as smaller urban facilities within, or nearby, large and high-density cities.”

Key themes highlighted in the report include:

Offices

The scarcity of modern, Grade A space means some rental growth can still be expected in the mid-term, albeit more limited than in previous years. Expectations of lower-for-longer interest rates mean property yields may take longer than expected to bottom out, extending the cycle. In this case, investment volumes should hold up as the attractive gap between office yields and government bond yields persists. High-quality assets with stable sources of income can provide safe havens, while regional office markets in which availability is tight may look attractive from a pricing perspective.

Retail

Technological developments, demographic shifts and changing consumer behavior are driving huge changes across the European retail sector. Those assets that offer consumers an enhanced shopping experience or convenience are more resilient to the disruption of changing shopping habits. Attractive risk-adjusted returns are still available for investors who select assets that can withstand and benefit from structural changes, for which active management is key.

Logistics

Occupier demand drivers are moderating due to the weak European economic outlook and rising operating costs. However, the logistics sector is set to benefit from structural changes such as the implementation of new technologies, automation, changes in consumer habits and development initiatives such as the New Silk Road from China to Europe. Rising completions will challenge rental growth, but the investment market is set to remain healthy in 2020 due to large volumes of capital available and attractive yields compared to other sectors.

UK

Assuming that either there is a Brexit deal or the UK remains in the EU, London is well-placed to benefit from reduced political and economic uncertainty that would likely support occupier demand. Office take-up has been fairly healthy since the referendum, and there should be support from the tech and media sectors as well as professional services. The UK retail sector remains challenging as more retailers go into administration, but there are some brighter spots, with retail park footfall showing some resilience. Strong demand for industrial and logistics space and rising rents have led to an increase in development activity, but with increasing volumes of Grade A space available, a greater choice of good quality space for occupiers will take the edge off rental growth prospects. E-commerce looks set to remain a key driver of take-up.

Andreas Trumpp added: “Whatever strategy investors take, we would advise them to partner with asset managers who have the local expertise and on-the-ground knowledge to pinpoint and secure the best opportunities in what will be challenging markets.”